Are We Ready for a Digital Indian Rupee?

On 20th October 2020, the Commonwealth of the Bahamas launched the ‘Sand Dollar’, a nationwide Central Bank Digital Currency (“CBDC”), thus becoming the first country to introduce a digitalcurrency which can be utilised by the public. The CBDC of the archipelago housing of 700 islands spread outD over the Atlantic Ocean, appears to be a well-advised undertaking. In the past few years, we have witnessed a global interest to explore and investigate the scope of the CBDCs. Several countries have voluntarily reviewed proposals to issue CBDCs, resulting in several initiatives such as the CBDC tracker, which tracks and provides data about the status of the CBDCs in different countries. While India has only recently begun research into CBDC, countries like China and Canada are currently engaged in their pilot phases of implementation.

What is CBDC?

In recent years, cryptocurrencies such as Bitcoin and Ether are beginning to dominate the financial space as a popular currency, promising security, and easy transfer at low fees. Cryptocurrency functions using blockchain technology are entirely decentralised; not controlled by any central bank, governmental, or monetary authority. As a result of decentralisation, cryptocurrencies derive their value from a mutual and shared expectation that a given cryptocurrency would be valued and utilised by others. Price volatility is a clear hinderance, preventing them from serving the functions of money efficiently.

Unlike cryptocurrencies, CBDCs are issued digitally by the central bank of a particular country. It would essentially be a digital version of a countries’ existing currency, for example, a digital form of the Chinese Yuan or Indian Rupee. As CBDCs are authorised and issued by a nation’s central bank, it would serve as a legal tender and would be seen as a liability or currency in circulation within central bank’s balance sheet. As they are backed by existing bank currencies, they serve to facilitate easy transactions and eliminate the need to make private bank deposits. The Deputy Governor of RBI, T. Rabi Shankar, explained in his keynote address that CBDCs are synonymous to fiat currency and that it is can be exchanged unit by unit with the same.

Why introduce CBDC?

It is the general view that CBDCs will operate as a digital version of a country’s fiat currency. It will also function as a unit of account, store of value, and medium of exchange for everyday transactions. CBDCs offer a combination of both the cryptocurrencies’ lauded security and expedience with the traditional banking, which promises regulation and is backed either by assets or currency reserves. CBDCs are currently being tested in Sweden, the United States, and other nations to observe if it allows for economical and easy transactions. It is also being assessed as an improved and alternate payments system. In India, with a significant percentage of the population having no access to banks or financial services, CBDCs can play a key role in promoting financial inclusion which would benefit many citizens in India.

According to Naveen Surya, the Chairman of Fintech Conversion Council and Emeritus Chairman, “CBDC could be used directly through mobile phone. It can use blockchain technology but doesn’t necessarily need to be linked to a bank account to hold it. This will convert your mobile device into a wallet. In short, it will fast-track financial inclusivity while building a cashless economy.” Moreover, CBDC payments would be final, therefore reducing the risks of settlement in the financial system. CBDCs not only offers better security and liquidity but also reduces cash management costs since all transactions are easily traceable.

India’s take on CBDC:

The shift from fiat money to digital and private currency has attracted numerous opportunities. However, it is also accompanied by challenges from existing and traditional aspects. The role of the central banks and intermediaries must be carefully charted out, inorder to successfully coexist with new structures. The RBI has stated that it has been working towards a ‘phased implementation strategy” under which, several key factors have been evaluated including its scope, underlying technology and mechanism. When it comes to the underlying technology, several factors have become challenges within the context of India. Cybersecurity and privacy are two integral factors applicable to all digital currency. It is imperative and almost non-negotiable that India develops a powerful technological infrastructure to ensure security and maintain privacy. Blockchain technology may fall short when assessing its feasibility for CBDC. The problem of scalability limits the number and amounts of transactions that can be handled. For instance, Bitcoin can only process 4.6 transactions per second.

This cannot manage the massive amounts of data that comes with the population size of India. CBDC exudes a considerable promise to transform the way citizens, companies, and even countries transact value. CBDCs act as a reliable alternative to physical payments can indeed guide even economies towards a cashless one. India’s quick and widespread acceptance of UPI platforms and electronic wallets gives it a real fighting chance to successfully benefit from the concept of CBDCs. It goes without saying that India needs to cautiously investigate and understand CBDCs.

However, I believe India may fall behind due to the lack expertise required for the successful implementation of CBDCs. While it will be required to alter other countries structures to suit a unique country, an economy such as ours must aim to attract extensive research on the subject. It will be exciting to see a new revolution of money, which if adequately seen through by transparency and cooperation on a global scale, will open a gateway to universal financial inclusion.